ESG disclosures, dividend payout policy, and the cost of equity. Indian evidence of a non-monotonic relationship

Purpose This study aims to analyse the non-monotonic impact of environment, social and governance (ESG) disclosures on the cost of equity of NSE 500 Indian firms from 2014 to 2023. Given the contention about the shape of the curve in the literature, the authors examine whether a U-shaped or an inverted U-shaped relationship prevails in emerging economies with top-down ESG pressure using the Indian sample. In addition, this study analyses the moderating role of dividend policy in explaining that relationship. Design/methodology/approach The authors have used ESG scores and financial data of Indian companies from Bloomberg and Prowess databases, respectively. Panel regression with industry and year-fixed effects is used to control for time-invariant unobserved heterogeneity. The results are robust to endogeneity and sample selection bias. Findings The study reveals a U-shaped relationship between ESG and the cost of equity in India. At disaggregated levels, this relationship persists for environmental (E) and social (S) pillars, whereas the governance (G) pillar exhibits a linear negative relationship. Furthermore, dividend policy plays a significant moderating role in shaping these relationships. Originality/value This study is among the first to examine the U-shaped ESG-cost of equity relationship in countries with rigid statutory ESG mandates. The study supports the agency-conflict perspective in India. The findings act as a primer for countries considering mandatory ESG disclosure regulations.